(Bloomberg) - BlackRock Inc. Vice Chairman Philipp Hildebrand said investors’ bets on US interest-rate cuts could prove excessive once inflation turns out to be stickier than anticipated.
The former Swiss National Bank president said that the rapid slowdown in consumer-price growth is giving financial markets a false sense of security about underlying pressures.
“Goods inflation is going to continue to drop quite rapidly — we have now negative numbers — and that basically brings down the overall inflation numbers quite dramatically,” he said in a Bloomberg Television interview at the World Economic Forum in Davos. “As a result, the markets have now priced in what I think is probably excessive interest-rate cuts in the US.”
Money markets are betting on six quarter-point reductions at the Federal Reserve this year and more than a 50% chance of a seventh move, according to swaps tied to policy-meeting dates. The first such cut is expected by May.
Hildebrand warned that investors will soon enough find out that such an outlook is mistaken.
“I’m a little worried we’re sort of priced for near perfection, sort of almost a perfect soft landing where inflation is gone as a problem,” he said. “At some point we’re going to realize that it’s not that easy to stabilize to the 2% inflation targets that central banks are looking for, and so the optimism in rates in the US in particular is probably overdone.”
In particular, Hildebrand warned that price increases in services are still prevalent and that wages are increasing rapidly. That will limit how far policymakers can aid households and businesses as amid anemic growth.
“There is going to be weakness in the economy, there’s no question about that, but I think what central banks will find, particularly in the US, that they won’t have as much room to cut as is currently priced in.”
GIP deal
BlackRock reported assets under management of just over $10 trillion last week, as the world’s largest asset manager announced it agreed to buy Global Infrastructure Partners for about $12.5 billion, its biggest acquisition in more than a decade.
The deal will vault the world’s biggest money manager into the top ranks of investors that make long-term bets on energy, transportation and digital infrastructure.
“Infrastructure, we believe, is the big story in private markets in the next 10-to-20 years,” Hildebrand said. “These are long term trends, we know we need to upgrade infrastructure across the world.”
Hildebrand also described the collapse of a Credit Suisse as a “tragedy,” and said the focal point for Swiss regulators and politicians is to oversee reforms that ensure such a situation can’t happen again.
(Updates with comments on BlackRock infrastructure investment from the ninth paragraph)
By Craig Stirling and Francine Lacqua
With assistance from James Hirai, Loukia Gyftopoulou and Tom Metcalf
